ALPHABET: the league of giants

11:43 17.01.2020

Singularity

Ray Kurzweil is famous for anticipating the next computer era: the global AI capacity will grow so unimaginably fast that the expansion trajectory will become almost purely vertical. While that is something to discuss with futurologists, Google is sure coming to the singularity point.

Probably, growth cannot be more vertical for a stock. But haven’t we seen it before? We have. However, we haven’t had another $1 trillion-worth company in the field because of that. Now we do – Alphabet.

$1 trillion

In 2015, Google was restructured, and Alphabet was born as its parent company. Now, Alphabet is the fourth largest tech corporation by revenue, with almost 100,000 employees. On Thursday, the company joined the league of $1 trillion value giants, after Saudi Aramco, Apple, Microsoft, and PetroChina.

Why? Advertising sales, acquisitions, cloud computing, healthcare innovations, self-driving cars, strong revenue reports – all of these seem to further ignite the appetite of investors. In fact, it is hard to find any factor against this company’s rocket-launcher pace of expansion right now. But it wouldn’t be analysis without putting a dark stain on this glorious picture.

Going old-fashioned

Let’s use the usual fundamental analysis to look at Alphabet/Google as a business. What do we know about it now? Its core is a search engine. As a product, it is as global as unique. As a source of income, it brings in internet advertising revenues. And probably will keep doing so in the foreseeable future. There is little ground to doubt that, but this is about where the certainty ends. Beyond this border, we have uncharted territories of innovative fields where Larry Page and Sergey Brin have long decided to discover and have gained much fame. But as investors, do we know how exactly these endeavors were successful from the business point of view? We don’t. We see YouTube celebrating 2 billion monthly users: congratulations, but does it tell us about the financial dynamics? Not much. In fact, YouTube has never disclosed its financial performance details. Yet, it is strongly believed to be the backbone of Alphabet’s revenue source as it generates over 80% of Google’s incomes.

What about other businesses that Alphabet is into? Google Cloud, Google Play, Nest hardware – we don’t know the financials of these either. In the meantime, it is crucial to have that information from an investor’s point of view. Not because we are questioning the prosperity of Alphabet as such (not at the moment). But because we need to see how its businesses perform against Amazon, Microsoft, and Apple, where these are sun-like experts, and Alphabet is a contender.

The futuristic ventures of Sergey Brin give little help in discovering the financial side of Alphabet’s functioning. Again, we do not question the potential for driverless car business or any other such field of innovation, but details matter for an investor. Time matters. If an innovative company fails to bring in income, it means the demand is not there yet, for various reasons. It may be there 10 years from now and make the shareholder insanely rich. But to become such a shareholder, a person needs to make an informed decision investing in a stock, which may have troublesome times for the coming decade but then become a shooting star.

And there is very limited financial evidence for such an informed decision. All we have is an exponential growth of Google’s stock value and a $1 trillion milestone reached by its parent company.

Flight duration

The daily chart does not provide much reason to doubt the stock. Since October last year, the price has been moving higher and higher, with the Moving Averages in ascending order supporting the healthy growth trajectory. The correct question here will be – how long?

The thing is that, as a long-term investor, we may be sure that the stock will bring a good return. But what if we want to be flexible with our positions within the coming months? The chart below is the same daily time frame, but on the longer period of observation. The 50-day Moving Average comes in handy to see the approximated price evolution through time – there are clear waves. They are different in length and magnitude, but they are present.

Putting aside the various factors affecting the wavy nature of the price performance, we will have a look at its average length. We can see that the current rising wave is clearly protracted in comparison to the previous ones. That should mean it is already in the red-zone of its duration and may go into a downward reversal soon.

Hence, we have to assume that in the short-term, there should be a correction downwards. Very possibly, that would extend into the mid-term as well, as analysts do not believe that Google stock is reasonably evaluated at the markets now. There will be a payback then. But for now, enjoy the sunshine. Just don’t forget the sunburn protection.